Local governments must set debt limits

The Ministry of Finance issued a guideline on Wednesday to regulate local government debt levels, the latest top-level document issued after an emergency plan to fend off debt risks came out in early November.

The guideline requires local governments to set their own limits to avoid breaking the debt ceiling approved by the nation’s top legislature.

The Ministry of Finance set this year’s debt financing limit at 1.18 trillion yuan ($171 billion) — 780 billion yuan worth of municipal bonds and 400 billion yuan in construction bonds.

The guideline was issued after an emergency plan was released under which the ministry for the first time announced four types of debt risks and corresponding emergency responses. Local authorities, which won’t be bailed out by the central government, must choose from responses including scaling down infrastructure investment, reducing government expenditures, making use of land sales and selling assets.

Liu Xiaochuan, head of Shanghai University of Finance and Economics’ China Institute of Public Finance, said the underlying message of the guideline is that the central government is trying stricter regulation and improved transparency to curb debt risks at the provincial and municipal levels.

Although debt has not reached alarming levels, a lack of transparency while local governments borrow and invest to meet infrastructure needs is a hidden risk, he said.

However, current efforts might not be enough to prevent financial risks, according to Liu.

billion

has been set by the Ministry of Finance as this year’s debt financing limit.

“It might be better to put the debt ceiling into legislation, because provincial authorities can protect themselves from accountability by adjusting their local ceilings after they submit their limits,” Liu said. The central government should make it clear when local authorities must submit their limits and not allow them to later change the limit, he added.

Outstanding debt of local governments added up to 16 trillion yuan by the end of last year, remaining well below the risky level, compared with other countries, according to Robin Xing, chief China economist at Morgan Stanley.

Xing added that the central government “will need to balance well between hitting the annual growth rate target and fending off financial risks next year”.